Aden, one-time leading port in Arabia and capital of South Yemen

This summer saw new unrest in troubled Yemen, as rioting broke out in response to government plans to axe fuel subsidies. With growing poverty inside the country, economists are increasingly worried about the country’s prospects for growth and diversification. Karen Thomas reports

AS YEMEN sweltered in the brutal heat of July, political temperatures were raised too, when hundreds of ordinary citizens took to the streets to protest against government plans to axe fuel subsidies valued at $1.4 billion. Rioting broke out, after the protestors clashed with security forces. The clashes left 22 people dead and more than 300 people injured.

President Ali Saleh’s government wanted to reduce the country’s budget deficit. But Yemen is a poor country in a wealthy neighbourhood, with an estimated 45 per cent of the population living below the poverty line and unofficial estimates suggesting that unemployment tops 20 per cent.

Removing subsidies for gas, kerosene, petrol and diesel threatened to double fuel prices. The government had pledged to reduce customs tariffs, increase state sector salaries and halve general sales taxes to cushion ordinary Yemenis from rising fuel costs. However critics, including opposition parties and leading clerics, urged the government to address corruption in the country, rather than lay the burden of reform on those who can least afford it.

Such was the scale of the protests that the government was forced to back down, reducing rather than axing the subsidies altogether. The cabinet announced that it would set petrol prices at $0.31 a litre (down from $0.34) and diesel and kerosene at $0.18, down from $0.23. The price of gas cylinders has been set at $1.82, down from $2.08.

Nevertheless, government sources have estimated that the climb-down will cost more than $700 million in 2005, raising the country’s budget deficit to 13 per cent. Although Yemen is an oil producing state, its reserves are dwindling to some four billion barrels by 2004, and the country imports nine per cent of its petrol and 60 per cent of its diesel from overseas. The country’s known gas reserves stand at 16 trillion metric tonnes.

Yemen is no stranger to poverty-related unrest. In 1998, rioting broke out across the country when the government started to implement reforms demanded by the International Monetary Fund (IMF) and the World Bank, including cuts in subsidies for fuel and food, as part of a restructuring programme launched in 1995.

New studies from consumer groups in Yemen suggest that 2005 has seen steep increases in prices of food and other staple goods, intensifying pressure on the poor. There is a growing consensus that something is deeply rotten in Yemen, deepening
poverty and rapid population growth coinciding with a steep drop in economic growth in the new century.

According to studies by the Economic Research Forum, a think-tank based in Cairo, Yemen’s economic growth has plunged from more than six per cent in 2000 to just 1.9 per cent in 2004. The report blames the government of Yemen for failing to achieve the economic targets set out in its most recent five-year plans. In 2004, per capita GDP stood at just $800.

Yemen’s 19 million population is growing at more than five per cent a year, and is expected to double by 2020. Half the population is aged under fifteen, and more than 45 per cent live on a daily income of less than $2 a day. Meanwhile, the government is struggling to create jobs for the 25,000 young nationals who enter the workforce every year.

This figure could be even higher. According to new studies by Yemen’s official Labour Market Programme, Yemen must create at least 188,000 jobs a year to reduce unemployment and meet annual labour market growth. The programme expected official unemployment rates to increase to 17 per cent in 2006, up from 11.5 per cent in 1999.

The country’s oil now looks set to run dry by 2012 – 10 years earlier than originally forecast. Running out of oil has serious implications for Yemen’s trade balance, for its economic growth and for its future. The country’s need to expand and diversify has never looked so compelling.

Barriers

Yemen is blessed with fertile land, from the high-altitude terraces of the north, to the coastal plains of the south, able to cultivate everything from coffee and qat to grapes, limes, dates and vegetables. Its coastal waters hold significant fish stocks, and foreign oil companies are prospecting the length of the country for new oil reserves.

In terms of its natural resources, Yemen could have become one of the strongest and most diverse Arabian economies. Historically, the country’s flourishing farming sector – based on livestock and cultivating everything from coffee to bananas – ensured that Yemen could feed itself with little dependence on imports.

North Yemen became independent only in 1960, and it came to rely heavily on neighbouring Saudi Arabia in its bid to transform itself from a backward, feudal state to a modern economy. Meanwhile, after British rule ended, South Yemen fell under the Soviet sphere of influence.

As the economies of the two Yemens opened, cheap imported goods and packaged foodstuffs supplanted traditional handicrafts and staple produce. Mutual hostility sapped both, and the two halves reunited in May 1990, following the collapse of the Soviet Union, to create the first multi-party democracy on the Arabian peninsula.

Politics aside, the merger was driven by a desire to reverse poverty, and by the need to exploit oil reserves discovered in the borderlands between the north and south. Optimism proved short-lived, however. Shortly afterwards, when Iraq invaded Kuwait in 1990, Yemen backed the losing side, questioning the deployment of western troops on Arab soil.

Reacting in anger, the GCC states expelled up to three million Yemeni migrant workers, a workforce that generated some $3 billion a year in revenue. The country has yet to recover from this loss. Even in 2000, remittances to Yemen stood at barely $1 billion. Unemployment soared.

Tensions rose and civil war flared for two months in 1994. Yemen’s pre-war per capita GDP of $600 fell to $270 by 1995 and inflation spiralled to 70 per cent. By 1995, the economy was on its knees. Fluctuating exchange rates devalued the Yemeni riyal, and the budget deficit stood at 34 per cent. In desperation, the government turned to the IMF and the World Bank.

Tough times called for desperate measures. The government reduced inflation to less than 12 per cent though tough cost controls. By 2000, Yemen posted a budget surplus and had sufficient foreign exchange reserves to cover ten months’ worth of imports. Nevertheless, a country of some 17 million people had a GDP barely equal to that of a major city in Europe.

Yemen’s future could lie with LNG. Ten years ago, a French oil company contracted to produce some five million metric tonnes of LNG a year over 25 years, in a project valued at some $3 billion. Production started in 2001.

Foreign observers say that one of the largest barriers to foreign investment is the country’s lack of literate, IT-skilled workers and a lack of language skills. It is a shortfall that the World Bank and IMF have sought to address through aid-linked programmes offering vocational and technical training.

Reports by the Labour Market Programme found that 93 per cent of private Yemeni industrial and trading companies suffered from a lack of skilled and trained labour.

Aden, one-time leading port in Arabia and capital of South Yemen, remains the country’s powerhouse, home to the petroleum refinery that is Yemen’s most important industrial venture. Many of Yemen’s most ambitious schemes are focused on the city – from revamping the fortunes of the port of Aden to turning it into a sea and air distribution hub.

When Aden Container Terminal opened, with Singaporean investment and management backing, in 1998, Yemen expected the city’s fortunes to revive overnight. But progress has not been smooth, with the Singaporean partners pulling out in autumn 2003 after the two parties failed to agree a renegotiated concession deal.

However, this summer saw the government sign an agreement in principle with Dubai Ports International to take over management at Aden Container Terminal, in a deal that will also cover commercial operations at the port, and management of the fledgling free zone and distribution park.

National carrier Yemenia won the tender to build the air cargo village at Aden International Airport as a joint venture with the government-owned Port of Aden, aiming to improve air cargo handling in southern Yemen, boosting Aden’s credibility as a potential sea and air cargo hub.

Similar to Dubai Cargo Village, the air cargo managers claim that sea and air traffic transhipped at Aden will save up to two days sailing time on board ship, taking advantage of the port’s geographical location. There are additional plans to develop Aden Free Zone as a long-term project.

To date, however, Aden has yet to fulfil its potential. Insiders fear that Aden cannot capitalise on its strategic port, cheap and skilled manpower and undeniable industrial potential, unless the Yemeni government creates the favourable climate for investors that Aden Free Zone needs to succeed.

“The question is whether or not Yemen can provide this,” says one senior observer. “Aden faces competition from Salalah in Oman and from DPA’s venture in Djibouti. This competition may be healthy – there is more than enough business for everyone – but Yemen must not miss this opportunity.”